Tech's center of gravity shifts north to San Francisco

The venture capitalist Vinod Khosla recently described Silicon Valley as a state of mind, rather than a geographical place. If that's the case, that state of mind can increasingly be found in San Francisco.

Young tech companies have been flocking to the city at such a rate lately that, in the words of Peter Wendell, founder of Sierra Ventures, in parts of San Francisco "you can almost go door-to-door."

San Francisco, a short hop by train or car from the chain of towns that make up Silicon Valley, has long had some tech stars of its own. But the number of prominent tech startups that have opened new or expanded offices here lately is a break from the past. The technology center of gravity in the region seems to be drifting northward to San Francisco.

Pinterest, Twitter, Zynga, Dropbox, Yammer and Rackspace are just a few of the companies that have moved into new office space here in the past two years. Companies have come to see opening a San Francisco office as a way to attract talent, and as more big names start to run their businesses from the city, so others feel pressured to be here to stay in touch.

As a mark of how powerful the lure of a San Francisco address has become, the fast-growing social network Pinterest left its Silicon Valley office in Palo Alto last week to set up shop in San Francisco. The company is already touting its location in its pitch to prospective employees.

Despite the high cost of living and notorious summer fog, many of the 20- and 30-something engineers who staff the technology industry prefer to be in San Francisco, which is seen as more fashionable and cosmopolitan than the suburban towns that stretch along Silicon Valley. That preference accounts for the fleets of shuttles that take workers from San Francisco to Silicon Valley and back each workday.

But the workers would rather avoid a commute if they can, and increasingly, they have that choice.

"When you're a young engineer and all the companies you're interested in are in the Valley, then you're going to work in the Valley. But suddenly if some of them start to have outposts in the city, then those become more attractive employers than the companies that aren't in the city," said Wendell.

"There's kind of a tipping point," he said.

"Our downtown San Francisco campus gives us a recruiting edge when attracting top talent," said MonikaFahlbusch, senior vice president of global employee success at Salesforce.com, which has been in the city since it was founded in 1999, and which purchased 14 acres of land here two years ago to build a new headquarters.

The current influx of tech firms began slowly just before the financial collapse of 2008. Google, for example, rented a new office in the city's bustling Financial District that July. In a statement at the time, a Google spokeswoman cited employees' desire to avoid a long commute.

The trend took off in earnest when two things happened at once: Real estate prices fell in the wake of the financial crisis, and Twitter and Zynga gained prominence in San Francisco. They were able to expand here in part because of the softer real estate market. And their presence drove other companies to cluster around them.

"With Twitter and Zynga there, it's now believed possible to build a larger company in San Francisco," Josh Elman, a principal at Greylock Partners, said in an email interview.

Twitter announced last spring that it would expand into a hulking office space in the mid-Market district, a formerly troubled neighborhood across Market Street from City Hall that now seems headed for rejuvenation. In a highly public effort, Twitter negotiated tax incentives from the city, which was endeavoring to revitalize an area with more than its share of empty storefronts.

Later in 2011, Zynga outgrew its offices in sleepy Potrero Hill and moved into a massive headquarters at the southern edge of the South of Market district. Zynga at first leased part of the building, then, after its December 2011 IPO (initial public offering), bought the building.

With its cavernous lobby and exposed brick walls, Zynga's office exemplifies the type of warehouse and loft-like spaces that young tech companies are drawn to in San Francisco, particularly in the South of Market (SoMa) district.

"Tech guys want open ceilings with all the exposed wires and pipes," according to David Phu, director of information services at TRI Real Estate.

Some of the young Internet firms can locate in San Francisco because they don't need big industrial spaces, said Colin Yasukochi, director of research and analysis at the commercial real estate firm CBRE. And outsourcing means some companies require less space for engineering staff.

Pinterest's new headquarters are just around the corner from Zynga. Dropbox, which offers cloud storage, opened its doors in April five blocks away. Home vacation rentals provider Airbnb will expand next year into a cavernous building down the block from Zynga that now houses a Diamond Exchange.

Yammer, which was recently acquired by Microsoft, leased a spot nearby in early 2011.

Klout, a social-networking status ranking service that launched in 2011, set up shop in SoMa specifically to be close to Twitter, said Lynn Fox, a spokeswoman. Twitter founder Jack Dorsey's latest project, Square, has its offices in the San Francisco Chronicle building. And Yelp, which went public earlier this year, already has its offices in SoMa, but will move next year into a larger space in the same area.

Following Twitter to mid-Market are cloud-based help desk software vendor Zendesk and dating site Zoosk, who will also benefit from city tax incentives. Storify, maker of a social-media curation tool that launched last year, is among tech companies with offices nearby.

The boom in San Francisco has been influential enough to reverse some long-standing commercial real estate trends. Prices in the SoMa district have risen to meet, and even briefly exceed, those of the more traditional business district on the other side of Market Street, according to TRI Real Estate data. The mid-Market area has drawn so much rental activity that TRI will introduce the neighborhood designation for the first time in its next quarterly report on real estate trends in San Francisco, Phu said.

To be sure, Silicon Valley is still home to many of the biggest names in tech. Oracle, Hewlett-Packard, Intel and Google still have their headquarters there. Apple and Facebook are pursuing expansion plans for their Silicon Valley offices.

But with even some established companies, including Cisco Systems and eBay, establishing beachheads in San Francisco, the city's role as a tech heavyweight seems poised to continue. Tech companies want to be where the action is, and, for now, it's in San Francisco.